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On 10 July 2012, Transparency International (TI) released TRAC 2: Transparency in Corporate Reporting (TRAC 2), a report on the anti-corruption regimes of the world’s 105 leading multinational public companies. At its core, the report highlights how many of these companies fall short of adequate levels of transparency through their reporting practices.

Evaluation

Three categories were evaluated separately based on the public availability of information: anti-corruption programmes, company structure and financial information for each country of operation. Each company was then scored on a 0-10 scale where 0 is the least transparent and 10 the most transparent.

Overall, companies have improved in their reporting of anti-bribery programmes; however, few indicate that facilitation payments are prohibited and reporting on monitoring procedures tends to be weak. In terms of organisational transparency, significant numbers of corporate holdings remain unreported and very few companies disclose financial data across all countries of operations.

The best performing sectors were mining, oil and gas, with Norway’s Statoil, the highest scoring company with 8.3. This was closely followed by Rio Tinto. The lowest scoring companies in Europe, Asia and America were all banks. All 24 financial companies featuring in the review scored 4.3 out of 10, with 13 of these failing to disclose any data on their foreign operations.

Impact

Since TI’s last report in 2009, the UK has introduced tougher anti-corruption laws, notably the Bribery Act 2010. The greater appetite for enforcement against companies has imported an increasing onus on compliance. With the recent exposure of a lack of transparency in both the media and financial industry sectors, it is likely that this will only develop and extend further still in the future.

The impact of TRAC 2 to a company’s image is yet to be known but, taken in context, it could be significant. From an investor angle, being able to gauge a company’s transparency commitments may make an investment more, or less, attractive. For the companies themselves, a potentially expensive overhaul of reporting procedures may be required to raise its profile. Commenting on this need to make internal structural changes, Jermyn Brooks, Chair of Transparency International’s Business Advisory Board said:

“If country-level financial information is not adequately disclosed, it is difficult to know how operations in many developing countries contribute to local governments. Experience has shown that the requirement to report encourages companies to build strong management systems supporting disclosures, and in the process improving their anti-corruption systems”

Policy recommendations

TRAC 2 also sets out policy recommendations to multinational companies, governments and regulatory bodies, the investor community as well as civil society organisations. Notably, one recommendation is specifically addressed to financial companies, due to their significant impact, asking them to extend their anti-corruption programmes to cover agents and intermediaries and prohibit facilitation payments.

What is clear is that the determination of organisations such as TI to review unethical corporate activity is robust and set to continue in the future. Companies eager to avoid low rankings must therefore be in a position to demonstrate how revenue is generated and invested across their practice areas and international operations.

Importance of ethical indices

TI has developed credibility in index terms through its Corruption Perception Index, which has been widely referenced and credited for sending a strong message to governments and businesses worldwide since its launch in 1995. Although the factors and weightings applied in the scoring process of TRAC 2 have given rise to some debate, it may well gather momentum as companies seek to engage with TI to improve their standing.

TRAC 2 adds to the growing importance of ethical indices. Other investors standards and sustainability indices include the FTSE4Good Index Series, a series of ethical investment stock market indices launched in July 2001, and the Dow Jones Sustainability Indexes, which, launched in 1999, tracks the stock performance of the world's leading companies in terms of economic, environmental and social criteria.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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